Mergers and acquisitions

Private lives

Koch Industries becomes America's largest private company

THEIR Dixie cups runneth over. Investors in Georgia-Pacific, an Atlanta-based maker of Brawny paper towels, Dixie cups and other paper goods, will get a luscious 39% premium for their shares, courtesy of Koch Industries, a privately owned conglomerate in Kansas. On November 13th, Koch agreed to buy Georgia-Pacific, listed on the New York stock exchange, for $13.2 billion in cash. It will also take on $7.8 billion of debt. Koch already earns over $60 billion of annual revenues from a quiet collection of businesses, from chemicals to energy and ranching, in some 50 countries. Adding Georgia-Pacific's $20 billion in sales will make it America's biggest privately owned company, surpassing Cargill, a farm-products outfit.

The deal called attention to the trend of American public companies delisting their shares and going private. One reason for this has been the heap of thankless—and many executives claim, pointless—extra tasks that regulators have forced on public firms in the wake of Enron and other corporate scandals.

To escape the corporate costs and personal risks associated with the post-Enron Sarbanes-Oxley act, some top executives have either fled their companies for jobs at private ones, or sought ways to take their existing firms private. The boss of Georgia-Pacific, Pete Correll, who will stay on as a board member, was quick this week to trumpet the benefits of privacy.

Both publicly listed and privately owned firms have always had their respective merits, which is why America boasts plenty of each. And the relative advantage of being privately owned has no doubt risen at least somewhat in the past few years. But that can hardly explain why Georgia-Pacific will be worth $3.7 billion more under Koch's ownership than it is as a publicly listed firm.

Part of the explanation seems to be that Koch has been shrewder than Georgia-Pacific's managers about trends in the pulp-and-paper business. Koch should be able to extract synergies by reintegrating Georgia-Pacific's business with some of the operations it had bought from the Atlanta firm in 2004. Some people have suggested that Koch, which has invested heavily in oil refining and chemicals, is now keen to diversify, explaining another portion of the premium.

But Steve Kaplan, a finance and corporate-governance expert at the University of Chicago's business school, reckons that it is best not to read too much into deals such as this one, since there is so much liquidity sloshing around America's capital markets. Mr Kaplan points out that while everyone has focused on the deals done by private-equity funds in recent years, a lot of deal money has also come from bankers who are eager to lend. Koch Industries, for example, has reportedly lined up an $11 billion loan from Citigroup to finance its purchase of Georgia-Pacific.

For big acquisitions, banks are now willing to lend at valuations matching those in 1986-87 and 1998, two periods notable for their froth. “We have a year or two, and we'll get another recession,” says Mr Kaplan, only half-jokingly.